Emerging Markets To Benefit From Us Elections

Most of the analysts at key financial institutions, including Renaissance Capital and JP Morgan Asset Management, believe that a Democratic president in the US will be positive for emerging markets.

As a general rule, what is good for emerging markets is good for South Africa, so this seems like welcome news, despite concerns over the possible impact of higher taxes on corporates and highly skilled people in the US.

Balance of power

The latter may, however, be negated to a large extent by the strong likelihood of a Senate controlled by the Republicans. This means that Joe Biden, if elected, will find it very difficult, if not impossible, to implement the more radical reforms that have been promising during his election campaign.

Some of the specific areas where a Biden presidency could benefit South Africa and other emerging markets, include the following:

• Enhanced confidence over emerging market investments by fund managers, as is already evident in the lowering of the risk spread between developing countries and high-income countries

• US policy will undoubtedly become more predictable, which should introduce a larger measure of global capital market stability and prevent the high level of currency volatility that has been experienced since Mr. Trump’s trade war with China erupted

• A risk-on sentiment amongst fund managers is likely to dominate under a Biden presidency, which should put some pressure on the US dollar, whilst benefiting most emerging market currencies. A higher level of institutionalised demand for emerging market equities and bonds is likely to ensue, which will assist with balance of payments stability.

• Democratic Party presidents tend to be more likely to assist developing countries through preferential trade agreements and other forms of assistance, especially in the field of economic development

• The Democratic Party is acutely aware of the threats posed by China’s large scale intellectual property theft and the need to preserve jobs for blue-collar workers in the US. Mr Biden’s approach towards countering China’s apparent quest for global supremacy will, however, be more diplomatic and may involve the encouragement of direct investment in selected African countries where US firms already have a strong presence. This would certainly benefit South Africa.

Less animosity towards US

It is important to also note the change in global sentiment towards the US that should occur with Mr. Trump out of the political equation. American business leaders and tourists will find themselves more welcome in developing countries than during the Trump era, which should pave the way for an expansion of trade, tourism and investment.

Such opportunities certainly exist, as many emerging markets are poised to re-ignite structural growth after the worst of the Covid-19 pandemic is over.

Growth in developing countries that possess fundamental political and financial stability and are essentially market-orientated (like South Africa) will continue to be driven by demographics, market reforms, infrastructure development and rising per capita incomes.

A Biden victory is likely to lead to a more stable global capital market and an investment climate that will foster a resurgence of globalisation – just what emerging markets need in the aftermath of Covid-19.

By Dr Roelof Botha, Economic Adviser to the Optimum Group